Wholesale gasoline costs in major metropolitan markets across the U.S. mostly increased during the week-ended St. Patrick’s Day, with supplier postings lower in the Rockies, while the gasoline futures contract slid to its lowest point since the end of February on a decline by global and U.S. crude values.
Nearest delivered Brent crude futures, which trades on the Atlanta-based IntercontinentalExchange, fell to a six-week low March 17 while U.S. crude represented by the WTI contract on the New York Mercantile Exchange is holding below $100 bbl on expectations for lower demand. Suppliers continue to use the Brent contract when determining returns for gasoline and diesel instead of the WTI contract which has held between an $8 and $10 bbl discount to Brent since March 11.
Crude values are pressured mid-March by slowing economic growth in China evidenced by a contraction in manufacturing for the world’s second largest economy and consumer of oil during the first two months of 2014, and comments from Chinese officials that its growth rate might come in below its 7.5% target in 2014. The WTI contract was further pressured by growing domestic supply, which reached a three-month high on March 7 per the latest data from the Energy Information Administration, and market expectations that supply would build further through April amid ongoing refinery maintenance.
Under pressure from crude values, the Reformulated Blendstock for Oxygenate Blending gasoline futures contract on NYMEX slide to its lowest point in March St. Patrick’s Day. The April contract took over as the nearest delivered RBOB contract March 1, heralding in the seasonal shift for gasoline from weakness to strength ahead of peak demand during the summer months.
The decline in RBOB futures comes despite a pickup in gasoline demand, with the EIA showing a 538,000 bpd surge in gasoline supplied to the primary market during the first week of March to an 8.949 million bpd three-month high. Domestic gasoline supply fell to its lowest point of 2014 at 223.8 million bbl during the same week.
Climbing ethanol values will likely erase the effect of expected lower costs for wholesale gasoline on retail prices, with the havoc caused by this season’s Old Man Winter continuing to adversely affect logistics for the blending component. Ethanol, which cannot be moved on most U.S. pipelines because of its corrosive nature, is mainly railed from production plants in the Midwest to destination markets along the heavily populated East, West and Gulf Coasts.
Rail movements for a host of commodities remained slowed by early season disruptions that backed up deliveries for ethanol in the Midwest while supply along the East Coast is at the lowest point since weekly records for ethanol began in June 2010. As a result, spot ethanol prices are trading above $3.00 gallon in most regional markets except in Chicago where they are holding in the mid-$2.50s gallon. New York Harbor spot ethanol is holding at a $1 gallon premium to Chicago ethanol compared with its typical 10cts premium.
The supply backup in Chicago has forced some production plants to cut output for lack of transportation to move out supply even as gasoline demand is increasing. Several analysts expect spot ethanol prices to continue to climb amid the supply-demand imbalance which would support higher retail gasoline prices.
Ethanol is primarily blended with gasoline at a 10% ratio in the U.S.
About the author
Brian L. Milne is the Energy Editor for Schneider Electric—a global specialist in energy management. Milne has been focused on the energy industry for 18 years as an analyst, journalist and editor. He can be reached at firstname.lastname@example.org.